Payment pains for growing businesses inevitable – but missed payments can be avoided

Missed payments are not only frustrating, but can be fundamentally damaging to a company’s cash flow and future growth. We meet two companies which have implemented systems to avoid such trouble.

AD

The stats don’t make for pleasant reading. Research from peer-to-peer business lender MarketInvoice in February showed that 62 per cent of UK SME’s invoices are paid after the due date, with one in five not settled until two weeks after the stipulated payment date.

Compared to the likes of Japan, Belgium, the Netherlands and Germany, all of which registered a trend of early payments, the UK is lagging behind, along with nations such as France and the US. After a hard day of work, you’re entitled to get paid. More importantly, you’re entitled to get paid on time. But that isn’t always the case.

Tom Johnson, co-founder of Lighthouse London, runs a web design and product development agency helping to build and steer digital products. He works mostly with startups, entrepreneurs and SMEs across a range of industries from music, lifestyle, travel and more.

Johnson invoices clients a percentage of the work before starting, ensuring that he and the business aren’t left vulnerable by exposure to unpaid invoices. His team splits payments over a series of invoices during the work rather than waiting on one invoice at the end of project. – how many depends on the size and length of the engagement. Invoices are not generally tied to deliverables, especially ones that could be held up by the client, but instead relate to dates.

“If we cause delays then invoices can be pushed back, but if clients hold things up we will invoice on that staged basis,” Johnson explained.

With a small but growing team, focused on growing through the hiring of developers and creatives, Johnson does all of his payment monitoring and chasing through an outsourced service. “This is a financial platform used to keep on top of accounting, invoice and time keeping,” he said. “We use it to help us know how profitable we are, as well as to clearly see where we are owed money, and indeed what we owe.”

We wanted to know what procedures Lighthouse London has put in place to mitigate the effects of missed payments. While Johnson has employed the services of a financial platform to handle initial chasing, if late payers do not respond to the automatic email chasers then he takes matters into his own hands. “Our process will start with us sending manual emails and follow up phone calls. We know that some businesses threaten clients that haven’t paid with court proceedings.” But Johnson would prefer to resolve disputes directly than end up in a courtroom.

Johnson knows cash flow is critical for his business, and in the last year he has seen significant growth in staff count. “We’re designers and developers by trade, not accountants, so this is stuff we have to learn – which has seen big changes in how we try and predict cash flow.

“We need to minimise any surprises and ensure we see any dips before they happen and act accordingly. We build sensible sales targets and keep a keen eye on trends in converting new and repeat business. This helps us to keep on top of what work is likely to come in and what resource we need to deliver it.”

Like Johnson and Lighthouse London, Halima Khatun runs a business that takes regular and repeat payments from clients – a process tailor-made to be disrupted by missed payments. Her PR and communications consultancy, HK Communications, has one side that provides media relations, copywriting, internal communications and online PR, and another that centres on providing training for startups that don’t have the budget to hire a PR consultant – or would rather learn how to do it internally.

For the retained PR clients, Khatun uses the traditional process of invoicing in arrears. Payment terms are agreed up front, and tend to be around 30 days. For the PR training side of things, which consists of events, workshops and online learning, payment is taken electronically in advance.

Khatun revealed that she does use the services of an assistant to keep on top of payments, but sometimes leads the process herself as she owns the relationship with clients.

“Like most PR agencies, our system is largely manual – raising invoices – so of course, this can fall foul of late payments. Thankfully this has rarely happened, and on the rare occasion it has, the reason has been due to an invoice getting lost in a sea of emails, and has been rectified by the client immediately,” she told us.

However, she added: “It would be unwise for any business not to plan for late or missed payments, or even fluctuations in cash flow, so having good reserves is vital. I also use the old-fashioned form of email prompts/calls to chase up payments if there are any delays. I find that dealing with this directly is much more efficient and solicits a better response.”

Khatun believes that, in an industry built on relationships, you can’t afford to annoy your client through any touch-point, whether it’s you or your finance team.
Johnson and Khatun have built up a system that works for them, whether automated or led by a personal approach. But as businesses grow and start to accept more new customers finance operations can become strained. The last thing business owners want is to spend their time chasing payments that they were not only expecting, but also relying upon.

One simple solution is to automate your payment collection via direct debit. Previously confined to larger organisations due to requirements by the banks, GoCardless has now opened up direct debit to startups and small businesses.

Once clients have signed up to pay by direct debit, payments are automatically collected on the agreed date with the payer receiving a notification of the amount being collected three working days beforehand. This means no wasted time chasing up monies owed or awkward conversations with your customers – happy cash flow and happy clients.

Share with your network

About Author

Hunter Ruthven is the editor of Real Business. He is also the editor of Business Advice, a title focused solely on a section of the business community currently underserved – micro companies. Alongside this, he is part of the team that hosts the Growing Business Awards, First Women Awards and Future 50 initiative.

Related Posts

Two years ago, infidelity site Ashley Madison was at the centre of a hacking scandal that leaked details of over 30m users. However, the company has now exclusively told Real Business about how the attack made it stronger and, ironically, more mature.

Growing up in the UK, iconic adverts were limited to television and print. The age of digital advertising is ever-present today, yet the images and messages conveyed in those adverts are still alive, stored as memories that make an appearance whenever prompted.

If you asked a cross-section of business leaders, owners and entrepreneurs what their biggest challenge is, I’m confident you’d hear the same recurring thought: how to scale the business in a sustainable, predictable, yet profitable way, quickly.